Anticipating the Other Side of the Rally
The torrid 17% rally from the June low is sputtering. That makes this market dangerous.
After bleeding all year because of persistent high inflation and a hawkish Fed, the market rallied on newfound optimism. The market anticipates six to nine months down the road and investors envisioned a Fed that is all done hiking rates by then amid falling inflation. But that’s optimistic. And the optimism has been waning.
Even if inflation has peaked, it’s still way too high and likely will be for a while. The Fed also indicated recently that it is willing to drive the economy into a deeper recession to quell this high inflation. Investors are awaiting more clarity from the Fed today as it speaks from the Jackson Hole meeting. Good luck with that.
The end of this rally, if that’s indeed what this is, is also ominous from a historical perspective. Bear market rallies run out of gas well below the high, like this one might be doing. In the financial crisis bear market, there were several double-digit rallies that petered before the market bottomed.
We may not know if this market is heading south until the rubber hits the road when investors return from vacation after Labor Day. Even if new lows aren’t in the cards, it is still difficult to see how stocks get lasting upside traction from here while staring at high inflation, a still-aggressive Fed, and now recession. Unless there is some serious, and unexpected, good news, it seems like the best scenario is sideways in the near term with a risk of far worse.
Under the circumstances, this newsletter is remaining cautious for the time being, with primarily defensive positions.
High Yield Tier
Enterprise Product Partners (EPD – yield 7.0%) – This midstream energy Goliath is having a very good year in a tough market. EPD has returned 30% YTD. But the stock still sells at a valuation below the market and its five-year averages. EPD also still trades below the 52-week high, the pre-pandemic high, and miles from the all-time high despite the fact that business is booming with 23% earnings growth in the second quarter. A cheap valuation with a rock-solid and high distribution in a strong industry should be an ideal place to be over the rest of the year. (This security generates a K1 form at tax time). BUY
ONEOK Inc. (OKE – yield 5.8%) – This more volatile and usually better-performing midstream energy company has been moving higher this month after having a lackluster year prior. In fact, OKE is more than 20% above the June low. It has the similar valuation, safe dividend, and favorable industry dynamic as EPD going for it. Plus, it is one of the few stocks that can endure both recession and inflation. BUY
Realty Income (O – yield 4.1%) – This legendary monthly income REIT has cooled off after a 20% surge higher from the June low. But O tends to move up and down a lot on a slow, longer-term trajectory higher. Earnings rose 10.2% and the company is navigating inflation and recession like a champ. The occupancy rate for its consumer staple tenants is the highest in 10 years and the company increased its guidance. HOLD
The Williams Companies, Inc. (WMB – yield 4.9%) – The stock is behaving like OKE. It had a strong year in 2021 and a steeper correction than most of its peers this year. OKE has also been trending higher since the June low. Natural gas demand is resilient, and the company is growing. Earnings per share shot up 29% in the first half of 2022 versus the same period last year. The recently reported quarter featured a whopping 48% earnings per share spike over last year’s quarter. Williams also increased 2022 earnings guidance. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 4.0%) – The biopharmaceutical company stock peaked in March and has been floundering ever since. That said, it’s still up 6% YTD, which isn’t bad in a tough year like this, especially considering the fact that it’s been crummy for five months and is 20% off the high. ABBV typically pulls back after big moves higher. It’s still a defensive company in a recession with an excellent longer-term prognosis amid the aging population. It should pay to simply hold the stock and collect the dividend through rough patches en route to better things in the future. HOLD
Broadcom Inc. (AVGO – yield 3.1%) – Like the rest of the technology sector and the overall market, AVGO got a nice move higher off the June low. The performance of the tech stocks has been encouraging. After leading the overall market lower earlier this year, the sector has been the second-best-performing sector over the last three months, even after a rough week. Broadcom is also very well positioned to benefit in a fundamental way from the 5G rollout and the proliferation of cloud computing. It reports earnings in a couple of weeks. Recent quarterly reports have been excellent and hopefully, the stock gets a boost this time. BUY
Brookfield Infrastructure Partners (BIP – yield 3.3%) – This infrastructure partnership might be the perfect income stock for the current environment. It has highly defensive and recession-resistant earnings with inflation adjustments built into its contracts.
The partnership also announced a joint venture with Intel to fund a $30 billion semiconductor fabrication plant in Arizona. It’s certainly a timely investment after the passage of the CHIPS Act and should get some generous government subsidies. Brookfield has been phenomenal at finding great investments over the years that are accretive and boost the stock price. The deal with Brookfield also makes me feel better about Intel. BIP spiked higher on the news. It’s been on a torrid uptrend since mid-July and may be moving to a new high. (This security generates a K1 form at tax time). HOLD
Eli Lilly and Company (LLY – yield 1.2%) – LLY bounces around a lot. That’s okay because while bouncing the stock has returned over 16% YTD and averaged a return of over 43% per year for the past three years. This pharmaceutical giant has proven time and time again that it is worth simply holding through the dips as the longer-term trend is consistently higher. Lilly has a strong pipeline and pending approvals of important drugs that could give it a big boost. HOLD
Intel Corporation (INTC – yield 4.3%) – The chipmaker just made a massive investment in chip production. It partnered with BIP for a $30 billion investment in a semiconductor fabrication plant where Intel will maintain majority control by providing 51% of the capital. It’s a big and bold move. But that may be just what Intel needs. After all, you’re not worried about climate change if you live in Siberia.
The company needs to be bold to get out of its funk. And the U.S. government is desperate to bolster chip production in this country and will likely provide generous subsidies. It’s a long-term endeavor that could pay off big down the road. But the stock has done nothing since the announcement. We’ll see how this news shakes out in the weeks ahead. HOLD
Qualcomm Inc. (QCOM – yield 2.1%) – Technology is getting slapped around again recently on renewed fears of higher than anticipated interest rates and inflation. But, despite Monday’s selloff, technology has been the second-best performing market sector over the last three months after being the worst performer in the earlier part of the year. That behavior insinuates a good likelihood that technology will recover before the overall market after leading it lower.
Earnings were again spectacular, but the company warned of lower smartphone sales in the second half of the year. The likelihood of slowing phone sales has pressured this stock lower for most of the year. That’s why QCOM is still well off the high. But those slower sales haven’t even materialized yet, and the company still expects 23% year-over-year revenue growth for the rest of the year. The stock sells at 11 times forward earnings, which is cheap for this level of growth. BUY
Visa Inc. (V – yield 0.7%) – Visa’s earnings knocked it out of the park. It beat expectations on both earnings and revenues, which were up 33% and 19% respectively. The company continues to benefit from increased global business from the ending of covid restrictions despite slower global growth.
The stock tends to move up and down with the fortunes of more cyclical stocks but tends to be among the first to rise when the environment gets friendly. V should actually be higher but is being held back by the threat of a new bill in the Senate that will limit credit card fees. We’ll see what the bill looks like and gauge the chances of passage. In the meantime, business is still booming despite inflation and recession. HOLD
Safe Income Tier
NextEra Energy (NEE – yield 1.9%) – After a crummy start to the year, NEE has been on a big run since the June low. It’s up over 25% in the last two months and may be on its way to a new high. It also got a big boost from the climate change bill that will be very generous to companies like NEE. This is a great utility and a phenomenal way for conservative investors to play the growth in clean energy. HOLD
Xcel Energy (XEL – yield 2.6%) – XEL has been a stellar performer this year, up 13% in a down market. It has seriously cooled off after making a high in May. But the market recovery and the passage of the CHIPs bill gave it new life and lately it has been making new highs. Plus, it’s in two timely sectors, utilities and clean energy, and should be well positioned for the longer term as well. HOLD
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 8/23/22 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 27 | 25% | 7.0% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 65 | 33% | 5.8% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 71 | 24% | 4.10% | HOLD | 1 |
| The Williams Companies, Inc. | 08-10-22 | 33 | Qtr. | 1.70 | 5.3% | 35 | 6% | 4.90% | BUY | 1 |
| Current High Yield Tier Totals: | 6.0% | 22.0% | 5.5% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 139 | 114% | 4.00% | HOLD | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 530 | 22% | 3.1% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 14 | Qtr. | 2.04 | 3.6% | 43 | 100% | 3.3% | HOLD | 2/3 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 315 | 114% | 1.2% | HOLD | 2/3 |
| Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 34 | -27% | 4.3% | HOLD | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 141 | 77% | 2.1% | BUY | 1/3 |
| Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 207 | -1% | 0.70% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 2.5% | 40.3% | 2.7% | |||||||
| Safe Income Tier | ||||||||||
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 88 | 115% | 1.9% | HOLD | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 75 | 214% | 2.6% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 2.3% | 164.5% | 2.3% | |||||||
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